Mercator Blog

Direct Banks are Vying for Market Share – and Deposits
Date: April 28, 2016
Ed O'Brien
Director, Banking Channels Advisory Service
Even though much of the banking industry’s attention is on digital and omnichannel banking, innovative new entrants are shaking up parts of the market. In some cases, these firms are not traditional banks or credit unions; rather they are subsidiaries of companies with roots in credit, lending, or other areas, or are fintech providers or partners.

One business model that has been gaining attention over the past few years is direct banking. Direct banks (also called Internet or online banks) include such firms as Ally, CapitalOne 360, Discover, GoBank, Moven, Simple (acquired by BBVA in 2014), and others (including now Goldman Sachs, leveraging its recent purchase of GE Capital Bank). These banks largely service their customers via an online-only presence, with a few offering limited access to branches.

The business model of these institutions is based on online and mobile banking platforms, and few, if any, branches. Direct bank cost structure is considerably lower than that of traditional branches, given the limited investment in staff and physical infrastructure.

In addition to offering low-or no-cost checking accounts, several of these institutions are aggressively pricing their savings accounts and CDs to build deposits and capital as a base from which to drive consumer loans. In several cases, yields approach, or are over, 1.00% on CDs and some savings accounts, much higher than the 0.01% offered by many of the major national banks.

Even with the rate advantage, direct banks may be appropriate for a subset of banking needs for some banking customers, particularly for those looking to maximize savings account yields. However, for those who desire face-to-face interaction, education, and advice by knowledgeable subject matter experts, a traditional bank model, or hybrid, may be more suitable for them.

As a result, some traditional banks and credit unions are developing hybrid strategies, increasing their investments in mobile banking and novel branch reconfiguration initiatives that are efficient and cost-effective, but offer personalized service.

The end result can be banking solutions from traditional banks and credit unions that offer both outstanding online and mobile customer experience while leveraging the strengths of existing or reconfigured branch networks that offer the best of the digital and traditional banking worlds.